Higher inflation rate on its way: portfolio managers

The inflation rate in Canada will rise "slightly, but meaningfully" in the next 10 years, according to the results of a study released today by the Portfolio Management Association of Canada (PMAC).

The survey of the CEOs of 24 of the country's leading investment companies found that they believe the inflation rate will rise to 2.8% over the next decade – almost 1% higher than the historical rate for the previous 10 years of 1.9%.

"All investors should draw on these directional insights in making their asset allocation choices and consider the impact of higher inflation on their portfolios when making investment decisions," said PMAC president Katie Walmsley.

According to the study, bond returns – which averaged 6.2% over the last decade – will only earn 2.9% in the next 10 years. What this means, said Bob Hill, past chair of PMAC and current managing director of Coleford Investment Management, is that for fixed income investors, their earnings will only be slightly higher than the predicted inflation rate.

"[For the fixed-income investor], your purchasing power is essentially being maintained, but nothing more," Hill told Business in Vancouver.

Other predictions based on the survey results are that:

Canadian equities are projected to earn 7.4% over the next decade, compared with 9.8% recorded over the past 10 years;

global equities are set to earn 7.8% over the next 10 years, compared with the 3.6% return they've had in the past decade; and

emerging market equities will return 9.1% over the next decade, compared with 11.9% over the past 10 years.

The full results of this survey will be discussed today at PMAC's 2012 Annual Conference and AGM today in Toronto.